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Eyes on Trade is a blog by the staff of Public Citizen's Global Trade Watch (GTW) division. GTW aims to promote democracy by challenging corporate globalization, arguing that the current globalization model is neither a random inevitability nor "free trade." Eyes on Trade is a space for interested parties to share information about globalization and trade issues, and in particular for us to share our watchdogging insights with you! GTW director Lori Wallach's initial post explains it all.

November 18, 2011

Your Ignorance is Agribusiness' Right, says WTO

Consumers and the environment are at risk following a series of World Trade Organization (WTO) rulings against popular U.S. policies.

As we noted earlier today, the agency issued a landmark ruling against U.S. efforts to reduce consumer confusion about the origin of the foods they eat. This followed two decisions from September against U.S. measures to reduce teen smoking and dolphin deaths. If the decisions are upheld on appeal, the United States will have to water down or eliminate its country-of-origin labels (COOL) for meats, dolphin-safe tuna labels, and ban on flavored cigarettes directed at kids.

These rulings confirm the worst fears of members of Congress and advocacy organizations, who warned of the dangers of expanding the scope of trade agreements beyond border tariffs into the domestic policy arena. This expansion was pushed by anti-regulation corporations, with substantial assistance from “free-market" ideologues who saw the WTO as a delivery mechanism for light-to-no touch regulation. (Ironically, these WTO decisions have negative implications for both more “free-market” and “interventionist” oriented consumer and environmental protection policies, as we explain below.)

What this ruling means for consumers

When the WTO rules against a country's policy, that country has to change the law to comply, or risk trade sanctions. In this case, Mexico and Canada (the "complainants") were successful in their challenge of U.S. labels.

The U.S. will have to get rid of COOL, or water down the policy to Canada and Mexico's satisfaction. Mexico's position was that the U.S. should simply revert to voluntary COOL, or utilize a weaker standard utilized by a global body known as Codex Alimentarius. But this is what the U.S. used to have that consumers wanted to move past. So it's unclear what would satisfy those countries.

The Obama administration may appeal the ruling, although the track record of successful appeals is very limited: the WTO rules against challenged policies 90 percent of the time, and upholds these rulings at the appellate stage an even higher percentage of the time.

The broader worry is that this ruling leaves the door wide open to attacks on similar consumer policies - not only in the U.S., but all WTO member countries - many of which use COOL.

After the jump, we provide more background on how we got here.

History of COOL

The U.S. has employed some form of country of origin labeling requirements going back to 1890, and greatly expanded the requirements (but not to meat) in 1930. Determining which country counts as the “country of origin” is difficult. In an era of global supply chains, different countries can supply the inputs to a single product, which can in turn be assembled in numerous countries. If the car wheels come from China, the steering wheel from Thailand, the rest of the body from Japan, but the car was assembled in Korea, which is the country of origin of the finished product? According to the standard methodology, where the origin is the last country where a product was “substantially transformed,” the car’s “country of origin” is Korea.

In the 1960s, consumers and policymakers began pushing for country of origin labels on meat. It was not a straightforward task. A longstanding concern of consumers has been that the “substantial transformation” – with its obscuring of information on the countries where all production processes took place – is especially ill-suited for meats. Under that standard method, a cow could be born in Guatemala, live its entire life in Mexico, be shipped to the U.S. for slaughter, and the beef would be labeled “Made in the USA.”

After decades of debate, the 2002 Farm Bill introduced country-of-origin labels (COOL) for meat and other products that went beyond the substantial transformation rule. According to a congressional report on the bill,

“Many American consumers want to know the country of origin of their food. This Act therefore requires retailers to notify consumers of the country of origin of beef, pork, lamb, fish, fruits, vegetables, and peanuts. This provision provides consumers with greater information about the food they buy. Most of the products U.S. consumers purchase today are already labeled, with the notable exception of many food products. This provision brings the United States in line with many of its current trading partners, who already have country of origin labeling. These countries include Canada, Japan, and the countries of the European Union…”

The 2002 Farm Bill capped off immense resistance by all the branches of government to fulfilling consumer desires. In the mid 1960s, U.S. courts ruled against efforts by Oregon, Iowa, Nebraska and Tennessee to require COOL for meats, finding that the mere fact of having to list origin was burdensome to interstate commerce. The Oregon ruling was upheld by the Supreme Court in 1967, prompting members of Congress to begin introducing legislation trying to get COOL at the federal level.

Fifty years later, consumers succeeded.

Industry also resisted COOL, and Congress delayed implementation so that the requirement did not actually go into effect for meats until another Farm Bill was passed in 2008, and regulations went into effect in March 2009. Under the rule, muscle cuts of meat can only be labeled “Product of the U.S.” if the source animals were born, raised and slaughtered in the U.S. If one or all of these stages occurred in other countries, any country-of-origin label must state “Product of U.S. and Country X” or “Product of Country X,” respectively. Ground meats labels must adhere to similar rules, and also incorporate information about the country where the grinding stage took place.

That's not to say that COOL was some sort of socialist utopia. In order to make it less costly for industry to comply with the measure, Congress also dropped the penalties for violating COOL between the 2002 and 2008 farm bills from $10,000 to $1,000, and dropped the time participants in the supply chain had to retain country of origin-related records from two years to one.

Despite these more lenient requirements, the repeated delays in implementation, and regular opportunities for foreign governments and industries to express their views to U.S. regulators, Canada and Mexico launched WTO proceedings against COOL in December 2008, before the final rule even went into effect.

In the words of one WTO dispute settlement panel, “the TBT Agreement is a development of the GATT.” Its purpose “is to prevent much more complex situations than a straightforward unconditional ban on a product, which is covered by the very strict provisions” of the GATT.

The TBT’s preamble states that its objective is “to ensure that technical regulations and standards, including packaging, marking and labelling requirements, and procedures for assessment of conformity with technical regulations and standards do not create unnecessary obstacles to international trade.” “Technical regulations” are deemed “mandatory,” unlike “technical standards” (TBT Annex I). Generally speaking, the former must not accord less favorable treatment to like imports (Article 2.1), create “unnecessary obstacles to international trade” (Article 2.2), and must be based on “relevant international standards” (Article 2.4), among other requirements. Technical standards, in contrast, face fewer restrictions.

While these provisions may not seem troublesome at first, many observers warned of their less obvious consequences. When the U.S. Congress debated the Uruguay Round Agreements Implementation Act in a lame-duck session in 1994, Rep. Peter DeFazio (D-Ore.) said:

“This agreement will put at risk the environmental, food, consumer, health and safety laws of this Nation to something called a World Trade Organization, an organization that will settle disputes over trade barriers, and trade barriers is interpreted as anything that restricts the free movement of goods, whether it is restrictions against child labor, whether it is restrictions against dangerous substances in food and pesticides…. We are lowering ourselves to the worst standards, to the lowest common denominator, in order to get something that a few multinational corporations desperately want.”

Senator Robert Byrd (D-W.V.), a noted expert on the legislative process who recently passed, warned:

“U.S. laws and State laws in many areas must comport first with the WTO's trade rules, or such laws can be challenged as an `illegal trade barrier' by other countries. Federal and State laws dealing with toxics and hazardous waste, consumer protection, recycling and waste reduction, pesticides and food safety, energy conservation, wildlife protection, and natural resource and wilderness protection, would all be vulnerable to WTO challenge. The new GATT would prevent countries from rejecting products based on how they are made; for example, with child labor or with ozone depleting chemical processes…. If environmental laws get in the way of trade, they must fall. If consumer protection gets in the way, if standards of innumerable kinds, get in the way of trade, they go. Humane methods of trapping tuna, in order to protect dolphins go out the window. Flipper loses. Rigid pesticide controls which make products more expensive are GATT illegal. Out they go. Child labor laws restricting trade are illegal. Who cares? Only trade matters. What happens when our laws are declared a violation of GATT? The Administration would like us to accept the proposition that no U.S. laws are wiped out here, and technically they are not. What will happen is that other member nations, perhaps prodded, or even dominated by one or a group of multinational corporations, will bring a complaint against the U.S. before the WTO, and a Dispute Panel could rule in secret against a U.S. law, as being GATT illegal. The room for pernicious manufactured claims should be obvious to all of us. This puts great pressure on us to change our laws.”

In 2011, the U.S. was at the receiving end of these predictions. The specific anti-consumer provisions of the TBT had not been frequently tested in the intervening 17 years. While the WTO has ruled on nearly 200 disputes, the TBT has only previously played a prominent role in a few of them. The WTO only found a significant violation of the TBT in only one of those cases, a relatively uncontroversial dispute brought by Peru against Europe related to when fish could be labeled “sardines.” The trio of rulings against U.S. consumer policies in 2011 was more significant, both because of the popularity of the policies they undermine, and some of the specific legal argumentation involved.

What today's ruling said

The implications of the ruling are especially dire, since so many countries utilize COOL. But, in almost psychopathic fashion, the WTO just stated that it wasn't going to think about these implications. (Paragraph 7.281)

The complainants brought two major claims: first, that COOL accorded less favorable treatment to imported products, in violation of TBT Article 2.1; and second, that COOL was overly burdensome on commerce in violation of TBT Article 2.2. They were successful on both counts.

There are some very troubling implications from the ruling.

First off, COOL does not discriminate against imports, so it is unclear why a trade agency should have even been evaluating the labeling policy in the first place. Consumers would still be able to buy imported, domestic or commingled meats - they would just have more information about what they were buying. Participants in the supply chain simply had to document the origin of the beef they were using. Sure, this imposes some record-keeping costs, but the costs do not go up appreciably depending on the origin, since you have to document U.S. origin as well.

Because of these facts, the complainants had to make an especially convoluted case, which the WTO appeared to accept in its major elements.

They argued that, even though COOL doesn't discriminate against foreign meat cuts or products, it indirectly harms the "upstream" product: live cattle and hogs. The U.S. attempted to argue that the WTO shouldn't allow this type of up steam analysis. After all, where could that end? Quantum physics and the various Taoist books I read as a nerdy teenager tell us that every action, however small, triggers an endless stream of reactions that change the nature of the universe. Well, the WTO didn't agree to restrict the scope of the TBT in that way, which greatly expands the purview of the TBT. (See paragraph 7.246)

The nub of the very complicated argument was whether and how much COOL provides incentives for slaughterhouses - who famously co mingle beef from dozens if not hundreds of animals from all over the planet in a single hamburger or packet of beef - to segregate the raw product by national origin and utilize less foreign origin beef overall.

Lack of economic evidence

Any schmuck off the street would, at this point, ask an obvious question: have U.S. imports of Mexican cattle and Canadian cattle and hogs actually declined since COOL? If so, is this decline caused by COOL? As it turns out, probably not, on both counts. USTR put forward a variety of factors that could impact livestock prices and import volumes, such as, I don't know, a recession? (paragraph 7.518) Moreover, U.S. imports of Mexican cattle were higher in 2010 than even before the recession and COOL implementation (paragraph 7.467), while Canadian cattle also rebounded in 2010 (paragraph 7.548).

Economists will get a kick out of the section of the ruling that examined the parties' econometric studies. Like an ambitious freshmen with attention deficit disorder, the panel weaves in and out of the analysis, stating at the outset that they had decided that discrimination existed even if there was no measurable trade impact (paragraph 7.439), before deciding to consider the data anyway. The parties disagreed in fundamental ways about the appropriate methodology, but the panel disavowed any responsibility for actually parsing the competing claims, as at paragraphs 7.480, 7.539:

the econometric studies submitted by Canada and the United States rely on different data and methodology, and it is not our task to establish a unified econometric report or to conduct our own econometric assessment. Instead, we examine the robustness of each study separately.

Here and in several places, the U.S. questions the completeness of Canada's analysis, only to have its objections poo-poohed by the panel. For instance, the U.S. questioned unclear methodology behind studies presented by the Canadians, which happily had an easy answer: the information was collected by a private company of private companies, and was therefore proprietary. So that's why it was, and shall remain, unclear. (7.497) That's a classic "reason, not an excuse" explanation, but the panel simply let it stand.

There was also a pretty selective picking and choosing of neoclassical economic methods, such as when the panel wrote:

The complainants do not claim less favourable treatment due to increased unit costs for imported livestock. Likewise, our analysis concentrates on the relative overall costs of the different business scenarios that market participants may choose in order to comply with the COOL measure.

Of course, how COOL impacts marginal costs would be of great interest to any serious neoclassical economic analysis.

No limits on state responsibility, nutty ideology

The WTO appeared to pick and choose from neoclassical methods when it suited the cause of finding a TBT violation. But one thing was fairly consistent throughout: an ideological commitment to a severely stripped down vision of the state, but one where nonetheless the state is responsible for virtually everything that takes place in its borders, and some outside.

A big part of the complainants' argument was that slaughterhouses faced new incentives imposed by COOL to reduce their purchases of foreign-origin meats, even if these couldn't be demonstrated by consistently lowered trade volumes due to COOL. The argument was based on the fact that slaughterhouses allegedly faced a choice of engaging in costly segregation of domestic and origin beefs (which could disrupt production schedules) or they could reduce purchases of foreign-origin beef.

USTR argued throughout the WTO proceedings that how private actors choose to comply with regulations is not the responsibility of the government, if the government doesn't require a specific method of compliance. Not to mention that it's not the government's responsibility how consumers react to the labels. In any case, there was no systematic evidence that slaughterhouses were actually responding in the way Mexico and Canada claimed they were.

The panel determined that, if government actions affect market or consumer perceptions even one iota, the state is overstepping into the market.

State liability does not end there, however. The panel wrote:

In the context of the COOL measure, there are five possible business scenarios in terms of whether the livestock being processed has domestic or imported origin:

(a) processing domestic and imported livestock and meat irrespective of origin and solely according to price and quality;(b) processing meat from exclusively domestic livestock;(c) processing meat from exclusively imported livestock;(d) processing exclusively domestic and exclusively imported livestock at differenttimes; or(e) processing both domestic and imported meat by commingling the two on the sameproduction day.

7.345 The above five business scenarios involve segregation of livestock and meat of domestic and imported origin at different levels of intensity and at different compliance costs. Three of the five scenarios involve processing meat from both domestic and imported livestock; one involves meat from exclusively domestic livestock; and another involves meat from exclusively imported livestock.

7.346 As noted above, the more origins and labels involved, the more intensive the segregation and the higher the compliance costs with the COOL measure throughout the livestock and meat supply chain. Commingling might reduce these costs at specific stages, but overall it still involves higher costs than processing single origin livestock only.

7.347 Accordingly, as a direct result of the COOL measure, business scenarios involving more thanone origin or muscle cut label result in generally higher costs than scenarios involving only oneorigin. The relatively less costly business scenarios are the ones that involve processing meat fromeither exclusively domestic or exclusively foreign livestock at all times.

In other words, slaughterhouses could specialize in processing "All-Mexico" source cattle, and not face increased compliance costs relative to "All-U.S." operations.

So, no discrimination, right? Wrong, said the WTO panel. Because Mexico (even before the COOL measure) had a lower market share, they would be unlikely to be able to build up the All-Mexico brand, so would be disadvantaged. Also, there may be geographic distances that could effect suppliers differently on the basis of nationality. (7.377)

The panel found that the U.S. government had an obligation to ensure that even-handed regulations didn't happen to affect market participants differently based on market and geographic characteristics it had no control over before it passed regulation.(7.397) In other words, it had to make every "business scenario" equally viable.

Burdensome trade impacts

Given the WTO panel's extreme approach to finding discrimination where none exists, it's perhaps not surprising that they would also find a violation of TBT Article 2.2 - i.e. that regulation is generally burdensome to commerce, apart from its specific impact on the commerce of Mexico and Canada. Indeed, the panel basically seems to equate major aspects of the two findings (7.574).

Article 2.2 reads:

Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade. For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create. Such legitimate objectives are, inter alia: national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment. In assessing such risks, relevant elements of consideration are, inter alia: available scientific and technical information, related processing technology or intended end-uses of products.

The phraseology, and the way it is interpreted, can be very confusing to non-WTO wonks. WTO panels can wax nice about how they don't question the "legitimacy" of objectives, which, to the untrained eye makes it sound like a concession to consumer or environmental protection.

But, as we show here, the real kicker is always in the other requirements, such as whether the regulation "fulfills" its objective, whether it is not more trade restrictive than "necessary," and whether less trade restrictive alternatives exist. In today's ruling, the WTO panel didn't allow the U.S. to even get past the test that COOL "fulfilled" the "legitimate objective" of consumer information, because, wait for it, Congress had inserted too many loopholes in the legislation to make it less costly to comply. Thus, COOL also violated Article 2.2.

Sweet irony! If the moral of the story was that consumer protection should be less loop-holey, then one could make the argument that consumers should be odd bedfellows with the WTO.

However, when taking the ruling as a whole, it's clear that this is not the moral of the story. No, the moral of the story is that however you choose to regulate, the WTO is likely to be a problem. If you choose very interventionist policies, like bans, the WTO will rule against you. (This was the case with the initial tuna-dolphin ruling from the 1990s.) If you choose lightly interventionist policies, like the aspects of COOL that gave rise to the 2.1 ruling, the WTO will rule against you. Finally, if you actually take steps to partner with business and reduce compliance costs (as USDA did with COOL), then you can get slammed with finding that your policy is "arbitrary" or doesn't "fulfil" your objective (as with today's 2.2 ruling).

Seems like the 1% really have their bases covered!

Was Obama's Team Really Serious in Their Defense?

A few final remarks. As with the dolphin and tobacco cases, there were major ways that the Obama administration's Office of the U.S. Trade Representative (USTR) appeared to be giving a less than vigorous defense. This is perhaps unsurprising, since USTR had opposed COOL before it became law.

For instance, a key element in establishing a finding of discrimination under the TBT is that the domestic and imported product are "like." One of the four accepted elements for establishing "likeness" is consumer preferences. Clearly, U.S. consumers (for a variety of reasons) differentiate between foreign and domestic meats. If so, then the products are not "like." USTR did not advocate for this argument, which could have rapidly dispensed with the Article 2.1 claim. (Paragraph 7.521)

Second, USTR argued that COOL is only about consumer information, and has no health protection objectives. (Paragraph 7.581) But there are environmental and health reasons to have COOL. The climate is harmed by the carbon emissions caused by long-distance shipping and transport. Buying local is a way to reduce those emissions. Also, U.S. inspection of foreign meats is notoriously lax. While this is an obvious problem, government has been unwilling or unable to expend the necessary dollars to significantly improve imported food safety. In a political climate obsessed with austerity, COOL then allows consumers to more readily identify product that went through the laxest part of the U.S. beef regulatory structure.

Of course, there's a variety of reasons the Obama folks may have been unwilling or unable to make these arguments, which amount to admitting that over-integration is ill-advised and the U.S. isn't protecting consumers in the normal course of business. However, the U.S. was ruled against on Article 2.2 because the WTO panel determined that consumer information wasn't happening to a sufficient degree (because of loopholes to reduce compliance costs). If USTR had found within itself to admit that COOL serves multiple (non-nationalist) purposes, it may have survived the 2.2 ruling.

Also, for the third case in a row, the U.S. faced accusations that it both violated the GATT and the TBT. Countries facing GATT claims can invoke GATT Article XX as a defense, which allows for deviations from the GATT in certain instances, such as to protect the environment. For a third time in a row, the U.S. didn't even attempt to invoke this defense. This could be a worrying sign, since the complainants may appeal the lower panel's refusal to find a GATT violation. If the Appellate Body agrees, the U.S. may find it more difficult to invoke Article XX retroactively. (Not that this would be a silver bullet. As we've noted elsewhere, Article XX-type defenses fail over 96 percent of the time. But it seems crazy to not load up your legal gun with all the bullets on hand.)

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Anyhoo, stay tuned for more, as we continue our monitoring of the WTO's push-to-the-bottom in consumer protection standards.